The Gap, Inc.

One Harrison
San Francisco, California 94105
U.S.A.
(415) 952-4400
Fax: (415) 512-1830

Public Company
Incorporated: 1969 as The Gap Stores, Inc.
Employees: 26,000
Sales: $1.93 billion
Stock Exchanges: New York Pacific

The Gap, Inc. has remained one of the top retailers in the United States since 1969 by tailoring its clothes to the evolving tastes of the baby-boom generation. As the members of that demographic group have shifted from the wearing of jeans as an expression of rebellion to the more general preference for informality in all modes of dress, The Gap has expanded beyond its original Levi’s-only format to the creation of a complete line of casual wear suitable for all ages. This successful corporate transformation was due largely to the ingenuity of Millard Mickey Drexler, president since 1983. The company was founded and remains under the overall control of Donald G. Fisher and his wife Doris F. Fisher.

Donald Fisher is not of the generation to whom The Gap owes its popularity. A member of a family that has made its home in California for generations, Fisher was 40 years old and a successful real estate developer in 1969 when he took note of a new trend among the city’s increasingly disaffected youth. Blue jeans, for years made chiefly by Levi Strauss & Co. for laborers and outdoorsmen, were suddenly becoming a part of the counterculture’s standard costume. Durable, cheap, comfortable, and acceptably offbeat, jeans were the perfect uniform for a generation of young people anxious to demonstrate its antipathy to corporate America.

Donald Fisher is said to have conceived of The Gap when he was unable to find the right size of Levi’s in a department store in Sacramento, California. He realized that jeans had become more popular than the current merchandising outlets could accommodate, and that like hamburgers, stereo equipment, and gasoline, they were ready to be sold through a chain of small stores devoted solely to that product. With the help of his wife, Doris, Fisher opened a shop near San Francisco State University in one of his own buildings, offering a combination of records and jeans. Their intention was to attract jeans customers by means of the records, but at first no one noticed the jeans, and Fisher was driven close to bankruptcy. In desperation, he placed ads in local newspapers announcing the sale of “four tons” of jeans at rock-bottom prices, and the clothes were soon gone. To emphasize the youthful ambiance of his new store, Fisher named it The Gap, an allusion to a currently hot topic, the “generation gap.”

He incorporated his business as The Gap Stores, Inc., an immediate success. Although the Fishers had no experience in retailing, their stores’ combination of jeans low prices, and wide selection proved irresistible to the huge market of 14- to 25-year-olds. Fisher added new outlets in San Francisco and was soon enjoying the benefits of chain store merchandising: centralized buying and advertising, excellent name recognition, and uniform pricing. Initially, The Gap Stores’s buying program was singularly uncomplicated, as the stores carried only one product, jeans by Levi Strauss & Co. The stores were brightly painted, often orange; filled with circular metal display racks known as rounders; and usually enlivened by rock and roll music. To keep rents low, the Fishers kept stores small—about 3,000 to 4,000 square feet. They located most of their stores in shopping centers, many of them enclosed in malls.

Two years after opening its first stores, The Gap Stores’s sales were running at $2.5 million annually, and the Fishers converted the company into a public corporation, although retaining the great majority of stock. With extraordinary celerity, they opened stores across the United States while maintaining tight control over the critical accounting, purchasing, and marketing functions of what was soon a sizable corporation. In five years, sales had increased almost 50-fold, to $97 million, and the number of stores had grown to 186, spread over 21 states. Analysts credited the company’s success to the Fishers’s observance of a few cardinal rules of retailing: The Gap Stores replaced its stock with maximum speed; its prices were low and stayed that way; big sellers were kept on the rack until they stopped moving, rather than being retired in favor of new styles simply for the sake of novelty; and few items were stocked—jeans, a few shirts, light jackets—each offered in its complete range of colors and sizes, ensuring a minimum of disappointed customers. The company’s growth was also made possible by the extensive national advertising of Levi Strauss, which provided 100% of the The Gap Stores’s merchandise during its early years. Such dependence on a single supplier has obvious dangers, however, and around 1973 The Gap Stores began marketing several labels of its own, as well as national brands other than Levi’s. These proved crucial to the company’s permanent health.

By 1976 the Fishers were ready to make The Gap Stores’s first substantial public stock offering. The company’s spectacular growth had attracted widespread interest, and its offering of 1.2 million shares sold quickly at $18 per share in May of 1976. Coincidentally, however, the retail industry went into a steep slide, which, when combined with The Gap Stores’s large expenditures for new stores, pushed the company into the red for the final quarter of its fiscal year, ending July 31. The value of the newly issued stock fell to $7.25, prompting nine separate class-action suits from outraged stock purchasers who alleged that the Fishers had tried to dump their holdings before The Gap Stores announced its bad news. These charges came despite the fact that the Fishers sold only about 10% of their holdings during the period in question. Rather than wage endless litigation, The Gap Stores settled the suits in 1979 for a total of $5.8 million, or 40c per share and did its best to mend its frayed relations with Wall Street.

By that time the company could pay such a figure without undue strain. Adding between 50 and 80 stores annually, The Gap Stores pushed its sales to $307 million in 1980 and was close to achieving nationwide representation. The jeans market was no longer quite so straightforward, however. Members of the great wave of youngsters who had come of age wearing blue jeans in the 1970s, were now older, wealthier, and more conservative, and the Fishers were busily attempting to break out of the jeans niche by expanding The Gap’s selection of clothing. Several experimental chains featuring upscale fashions were essayed, brought together under the Taggs name, but were eventually liquidated because they were unprofitable. Gap stores were enlarged to handle increasing amounts of what became known as casual wear and were frequently moved outside of shopping centers to free standing locations, where space was plentiful and rent lower per square foot.

Along with the search for a line of clothes that would appeal to an older clientele, the Fishers also faced Levi Strauss & Co.’s decision to supply big mass-marketers such as Sears and J.C. Penney with its jeans. Levi’s were now sold everywhere, underscoring The Gap Stores’s need to develop a label and look of its own. The company’s own brands, created during the 1970s, generated about 45% of Gap sales in 1980, with Levi’s adding an equal amount and other national brands making up the balance. Considering that ten years earlier essentially all of the Gap’s sales were Levi Strauss & Co. products, the 1980 figures represented an achievement, but it was clear that if the company were to avoid inundation by the rising tide of jeans discounters it would have to fashion a new, exclusively Gap image.

To accomplish this task, Donald Fisher hired Mickey Drexler as president in 1983. Drexler, then 40, had just solved a similar problem with AnnTaylor, creating for that chain a new, more chic image and quadrupling sales in the bargain. Drexler was born in the Bronx to a family with roots in the garment business and by age 23 was a buyer for Bloomingdale’s. After a stint at Macy’s, he became president of AnnTaylor in 1980, where his work caught the eye of Donald Fisher, who was contemplating the future of The Gap. Drexler accepted the job as president at the end of 1983 and was given a block of stock that has made him one of the country’s wealthiest retail executives. He immediately began designing The Gap wholesale transformation, in spite of the company’s currently excellent financial status. The new president found little that he liked; proliferating competition in jeans and The Gap’s youthful marketing image had forced the company into a price-driven volume business. Its orange-painted stores were cluttered with rounders displaying merchandise of many labels that Drexler would later describe to The New York Times as “trendy but not tasteful. . . well, just plain ugly.” Worst of all, most consumers perceived The Gap as strictly for teenagers, at a time when people who grew up in the 1960s were developing more upmarket tastes. It would be difficult to overcome The Gap’s 15-year tradition as the place where kids went to pick up a pair of Levi’s.

Drexler began by eliminating all private label brands but one: Gap. Levi Strauss products were kept but relegated to the background; henceforth, The Gap would be known not only as a store, but as a line of clothes as well. Drexler created a large in-house design staff to develop clothes that would be casual, simple, made of natural fibers, and more clearly differentiated by gender than were jeans. The look was informal but classic—still denim-based but including a variety of shirts, skirts, blouses, and sweaters in assorted colors and weaves. It was clothing for people who wanted to look and feel young without appearing slovenly or rebellious, a description that fit a vast number of U.S. consumers in the 1980s.

Gap stores were substantially revamped. Neutral grays and white replaced the garish orange, and the ubiquitous rounders gave way to shelves of neatly folded clothing under soft lighting. The company’s advertising, as devised by Drexler’s long-time colleague, Maggie Gross, shifted from radio and television to upscale magazines and newspapers and featured older models engaged in familiar, outdoor activities that were not necessarily connected with the youth culture. A few years later, Gross launched the “Individuals of Style” campaign, a series of black and white portraits of both famous and unknown subjects by a team of celebrated photographers. The ads stressed style, not The Gap, whose clothes did not even appear in all of the photos, and they were enormously successful in helping to change the public’s perception of the company. The Gap came to mean good taste of an informal variety, and the brand name Gap soon acquired the cachet needed if the company were to compete with other retailers of casual wear such as Benetton and The Limited. In addition the word “stores” was dropped from the company’s name.

Drexler’s revolution at The Gap cost a good deal of money, and financial results for 1984 were poor, with profits down 43% to $12.2 million. By the middle of the following year, however, it was clear that he had pulled off something of a miracle. Gross revenue, profits, and same-store sales were all up; more importantly, the company had fresh energy and a merchandising focus that could carry it for years to come. In the meantime, The Gap had acquired a number of other retail chains, for better and worse. Foremost among these was Banana Republic, founded in 1979 by another California husband and wife team, Melvyn and Patricia Ziegler. The chain of safari and travel clothing stores was bought by The Gap in 1983 and its sales were doubled each year through the mid-1980s, slowing quickly thereafter. At its peak in the late 1980s, Banana Republic achieved highly profitable revenue of more than $250 million a year and figured largely in The Gap’s long-range planning. However, the bubble eventually burst for safari gear, and Banana Republic soon became a money-losing liability. In 1988 Mickey Drexler took over direct control of the division, shifting it from jungle attire toward gentler species of outdoor wear. In the early 1990s, Banana Republic was continuing to tread water.

Two other chain store acquisitions were not as profitable for The Gap. Pottery Barn was a housewares chain of about 30 stores in New York and California that had problems for several years before it was liquidated in 1986. The Gap also tested the higher end of the clothing market with Hemisphere, a nine-store chain of upscale U.S. sportswear with European styling. Created in 1987, Hemisphere offered elegant fashions, but soon ran afoul of a severe recession; the chain was disposed of only two years later. Neither mistake was serious enough to cause more than a few tremors at the parent company, which had a spectacular rebirth in the Drexler era that left ample room for such experimentation.

Revenue, net income, and return on equity have all been outstanding since Drexler’s program took effect in 1985. The Gap’s transition from a discount jeans warehouse to a sleek fashion arbiter was not altogether painless, yet the result had been more successful than Donald Fisher and his wife could have imagined. In 1991 the Fisher family still held more than 40% of the company, which operated more than 1100 stores in the United States, Canada, and the United Kingdom and had plans to expand total sales area by 15% annually. Not only had The Gap followed its baby-boom clientele as they grew older and wealthier, it provided for their children, too. GapKids in the early 1990s was the fastest growing segment of The Gap as a whole, offering a modified selection of Gap clothing in children’s sizes. One-third of the more than 170 GapKids stores included a babyGap department for toddlers. Banana Republic remained something of a blemish on the otherwise perfect Gap picture, but it was at least able to pay its bills.

Further Reading

Abend, Jules, “Widening the Gap,” Stores, November 1985; Van Meter, Jonathan, “Fast fashion. Americans want clothing that is quick and easy. The Gap made a billion giving it to them” Vogue, May 1990; Barmash, Isidore, “Gap Finds Middle Road to Success,” The New York Times, June 24, 1991.

—Jonathan Martin